By Brian Greer – Partner at TaxConnex, LLC
Another holiday shopping season is here, and once again eCommerce promises banner sales. Retailers looking forward to perhaps record online sales should remember the need to comply with states’ widely divergent sales tax regulations.
According to data from Oberlo, in 2023 retail sales worldwide are forecast to hit $30.3 trillion, 4.5% more than in 2022. In 2022, U.S. holiday retail sales are expected to reach $1.3 trillion, a 3.3% increase over 2021 – though in-person sales are expected to be slightly down year over year. Holiday ecommerce, on the other hand, is expected to grow a robust 15.5%, to $236 billion.
A lot of retailers (including many for the first time) may face unprecedented sales tax obligations. Below are three tips to help you ensure compliance before, during and after this busy holiday season.
What’s Your Nexus?
The connection between your online business and a tax jurisdiction (such as a state) is called nexus. For years, a company created sales tax nexus physically through having retail location, an office, sales representatives or stored inventory in a state. Physical nexus remains a frequent trigger of sales tax collection and remittance obligations.
The Supreme Court’s 2018 Wayfair decision, however, paved the way for states to enact various economic nexus rules. States (and often local tax jurisdictions) could suddenly require companies to collect sales tax from customers and remit it back to the state if the companies exceeded a certain volume of sales in a set period – for example, $100,000 in sales or 200 transactions in a calendar year.
All states with statewide sales tax have economic nexus thresholds. Missouri is the last hold-out with their economic nexus rules taking effect in January 2023. (You can see a list of states’ latest economic nexus thresholds here..)
Local jurisdictions, aka home rule jurisdictions, bring another level of complexity to compliance. Home rule jurisdictions are granted the authority by certain states’ constitutions to pass laws to self-govern, which includes making sales taxes laws.
Local jurisdictions’ control over sales tax can vary widely. In Alaska, local jurisdictions have formed the Alaska Remote Seller Sales Tax Commission to administer the collection and remittance of local sales tax. In Alaska (as well as in Colorado, Illinois and Louisiana, among other states), this issue is compounded by the additional challenge of divergent tax bases, where different jurisdictions tax different of goods and services. In Colorado, home rule jurisdictions can set both their own sales tax administration and their own sales tax bases – potentially increasing registration, filing and remittance burdens on remote sellers.
Sellers have begun pushing back against the nation’s patchwork compliance rules, but for now nexus remains a major concern for online retailers.
Understand Obligations Stemming from Marketplace Facilitators
Another complexity requires consideration of not just taxable sales but your gross sales as well. Some states’ revenue thresholds are defined by the taxable sales rather than the gross sales sourced into the state. This is where selling through marketplace facilitators such as Amazon comes into play. Specifically, using Amazon or another marketplace facilitators will often contribute to the revenue thresholds leading to economic nexus even if these marketplaces are required to collect and remit the sales tax on your behalf.
Most states determine their threshold numbers by gross sales from all revenue sources whether they’re taxable or not. Currently, states with an economic nexus threshold that don’t include gross sales include Alabama, Arkansas, Colorado, Minnesota (though there are special rules concerning “solicitors” in the state) and Oklahoma. Companies that sell products or services via their own website as well as through a marketplace facilitator may also have nexus in more states than they realize.
Marketplace facilitators sometimes have their own nexus concerns. New sales tax collection and remittance requirements in Kansas, for instance, apply to marketplace facilitators with calendar-year sales sourced into the state exceeding $100,000 of “cumulative gross receipts,” which includes both the marketplace facilitator’s sales of its own property and services and the sales it facilitates on its platform.
It’s Not One and Done – Rules Change Often
Regarding facilitators and physical nexus, a look at a recent court determination in Pennsylvania shows how sales tax laws can change – and, it seems, are always evolving.
In a decision that may eventually have sales tax repercussions elsewhere, the Commonwealth Court of Pennsylvania has decreed that an Amazon warehouse creates no physical nexus for a group of online sellers. The court sided with the Online Merchants Guild when the latter contested charges by the state Department of Revenue (DOR) for taxes owed. The Guild is a group of online businesses who participate in Amazon’s Fulfillment by Amazon (FBA) Program, who generally had limited choice where their inventory was stored and who had no other connections to the state.
The state court ruled that Pennsylvania’s Department of Revenue failed to provide sufficient evidence that non-Pennsylvania businesses selling merchandise through the FBA Program were required to collect and remit sales tax.
Then there’s Colorado, which has begun imposing a 27-cent fee on every retail delivery made by motor vehicle to a destination in the state. The fee will apply when at least one item is subject to sales or use tax and the delivery is mailed, shipped or delivered by motor vehicle.
(The latest developments in sales tax are updated monthly in the TaxConnex blog.)
This holiday season could be one of the most intense for online businesses trying to keep track of their sales tax obligations across states. It might well be best to seek expert help.
About the author
Brian is a graduate of Purdue University and has lived in the Atlanta, GA area since 1997. Brian has worked in the sales tax field since 2000 and prior to that worked predominantly in software
sales. Learn more at www.taxconnex.com.
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